On Aug 7, we maintained a Neutral recommendation on Fastenal Company (FAST - Analyst Report) following mixed second-quarter 2013 results. However, continuous weakness in its top line is disturbing.
Why the Neutral Recommendation?
This industrial and construction supplies company announced second-quarter 2013 results on Jul 10. Adjusted earnings of 41 cents per share were in line with the Zacks Consensus Estimates but grew 7.9% year over year on the back of decent gross-margin growth. Revenues missed the Zacks Consensus Estimate despite a 5.3% growth. The company continues to struggle with sales growth. Top-line growth was slow due to soft fastener sales and weakness in construction.
Fastenal’s daily sales growth rates have been weak since the last 3 - 4 quarters mainly due to a weakness in its fastener product line caused by end-market slowdown and broader economic uncertainty. From more than 15% growth in the first quarter of 2012, the fastener product line, which accounts for more than 40% of company sales, dropped to 1.9% growth in the second quarter of 2013. Industrial vending was also soft in the second quarter. Estimates have mostly shown a downward trend after the weak second-quarter results.
Though management is consciously slowing down the vending signing pace to focus instead on quality of vending contracts, industrial vending still remains one of Fastenal’s primary growth drivers. It has the potential to significantly increase the company’s sales and profits. Interestingly, management is deliberately slowing down focus on vending and instead encouraging stores to improve near-term sales. We believe this is a prudent strategy to improve its top line. Further, the strategic decision to slow down store growth and instead increase headcount will drive near-term sales growth.
We are also encouraged by Fastenal’s other growth drivers like government business and metalworking, which are gaining traction and could help achieve profitability in 2013 and beyond. We, thus, remain on the sidelines on solid long-term fundamentals.
Other Stocks to Consider
Fastenal carries a Zacks Rank #3 (Hold). Other companies in the sector that are doing well include Lumber Liquidators Holdings, Inc. (LL - Snapshot Report) , Builders FirstSource, Inc. (BLDR - Snapshot Report) and The Home Depot, Inc. (HD - Analyst Report) . While Lumber carries a Zacks Rank #1 (Strong Buy), The Home Depot and Builders FirstSource carry a Zacks Rank #2 (Buy).